P/E ratio too rich for Barminco float

“There are plenty of cheap, beaten-up stocks on the sharemarket already. And they come with a listed track record," a small-caps manager told Financial Review DealBook on Wednesday afternoon, almost perfectly summing up the market’s mood after Barminco was forced to postpone an attempted initial public offering.

Barminco ticked a lot of boxes for fund managers. It had a good management team, strong relationships with customers, a full order book, a long operating history and reasonable market share. But it was not enough to hit the ASX board at the sale price: 10 times expected earnings.

The problem for Barminco, and its advisers at Goldman Sachs and Gresham Advisory, is that fund managers have numerous alternatives that are trading on the market for less. Barminco is a unique asset in Australia. It makes about 62 per cent of its earnings from underground hard-rock content mining domestically, and 24 per cent from such services in Africa.

While there are no other listed companies in Australia predominantly in the underground hard-rock contract mining space, Goldman Sachs, in pre-marketing research last month, said Barminco would be compared with mining services companies with some similarities, and small industrials.

Companies mentioned included
Boart Longyear
,
Swick Mining Services
,
Downer EDI
,
Macmahon Holdings
,
Industrea
and
Mastermyne
, all of which traded at less than the 10 times expected 2012 earnings on Wednesday, according to Bloomberg. Those trading above that mark included
Ausdrill
(10.6x),
NRW Holdings
(12.4x),
MACA
(10.5x) and
WDS
(11.7x).

Fund managers argue that market debutantes should be offered at a 10 per cent discount to their listed peers, if not more, to compensate for the risk in backing a new stock and the time taken to get familiar with it.

In fairness to Barminco, the mining services sector has been hit in the market-wide selloff that has the benchmark S&P/ASX 200 index below 4500, which has cut the trading multiples of its closest competitors. “We have the opportunity to pick up high-quality names at depressed P/Es," another fund manager said.

It is understood Goldman Sachs tried to cut Barminco’s price to nine times earnings, but the vendor and investors were still not happy.

Company Profile

Indeed, the continual downward revisions to the float’s offer price, which was announced at 10 to 12 times earnings and cut to 10, was not taken as a good sign by investors.

For what it’s worth, fund managers had a longer list of positives than negatives, showing there was hope for Barminco in better markets. They said its management presented well during the recent round of roadshows, they were impressed with its safety record and praised its team approach to drilling where employees effectively competed against each other.

Another fund manager rang up Barminco’s biggest clients, and heard only good things.

They were also impressed with the company’s order book. About 98 per cent of the forecast 2012 revenue ($835 million) was underpinned by current contracts and the commencement of awarded or preferred tenderer projects, management said. Few argue with the outlook for mining services providers. The sticking point was price.

“This is effectively a complete recapitalisation of the business," another fund manager said. “When a business is recapitalised, you expect a discounted entry point."

In a statement on Wednesday afternoon, Barminco chief executive
Neil Warburton
said the IPO had been postponed because of “market volatility and macro financial issues affecting sentiment in global markets".

Investors welcomed the opportunity to have another look at Barminco in the future, should the opportunity arise. But they want Barminco and its advisers to think extra hard about the price.